Which is best? Time in or timing the market?
Many investors dream of finding a way, a magic trick if you will, that enables them to always buy low and sell high. But here’s the truth: even seasoned professionals and traders struggle to consistently time the market. The alternative is often considered a much more effective and proven strategy for most investors.
Time in the market.
In other words, long-term investing.
What you will learn
- The fundamental differences between “time in the market” & “timing the market.”
- Why attempting to time the market often leads to suboptimal investment outcomes.
- The psychological factors influencing investment decisions & how they can impact returns.
- Historical evidence supporting the benefits of long-term investing.
- Practical strategies to maintain a disciplined, long-term investment approach.
What is timing the market?
Timing the market is the attempt to predict the highs and lows of the stock market.
In summary, buying in just before prices go up and selling before they fall. It sounds logical in theory, but in reality, it’s near impossible to execute consistently.
As we know, markets can move quickly and unpredictably. By the time you’ve decided to act, the perceived opportunity has likely passed.
What is time in the market?
In contrast, time in the market is the strategy of staying invested over the long term, through bull markets, bear markets, and everything in between.
This approach leans on compounding returns, dividend reinvestment, and the potential for long-term economic growth.
This is particularly true for higher earners, with tax-efficient investment portfolios including pensions and ISAs,
The longer you stay invested, the higher the chance you will benefit from long-term capital growth.
Why market timing fails for many investors
Market recoveries don’t send invitations – they’re not advertised. They arrive suddenly, often right after steep downturns.
If you’re trying to time the market, and you miss these critical days, you may miss the perceived opportunity.
However, it’s important to say this. We are not recommending in any way that our readers try to time the market. The content in this article is here to help you choose your best foot forward and to furnish you with helpful information.
The impact of emotional investing
Emotional investing, fuelled by fear, panic, or euphoria, could lead to buying high and selling low.When markets tumble, people can be prone to panic and exit the market, returning to the perceived safety of cash.
Those looking to time the market often tend to exit during downturns and re-enter after recoveries, locking in losses and missing on gains (if they had stayed invested).
What history shows us about the value of long-term investing
From 1984 to 2019, the FTSE 100 Index experienced a price increase of 654% and a total return of 1,377% when accounting for reinvested dividends. This translates to an annualised price return of 5.8% and a total return of 7.8% per year.
- Source: What are the average returns of the FTSE 100? (IG)
Case study – COVID and the rebound
During the COVID-19-induced market downturn in March 2020, many investors moved their portfolios to cash.
However, those who stayed invested experienced a significant rebound. For instance, the FTSE 100 fell by 36.6% by March 23, 2020, but then rose by 22.3% by May 22, 2020.
- Learn more: How does the FTSE’s performance in 2020 compare to history? (Schroders)
This underscores the potential benefits of staying invested during market volatility.
Making shrewd investment decisions in a market downturn is vital, and that’s why people often seek the advice of an experienced financial adviser.
Why we’re wired to get it wrong
The human brain is not built for investing. We’re naturally loss-averse, meaning losses feel worse than gains feel good.
Media headlines amplify our fears, often prompting reactive decisions, as mentioned above. But investing success isn’t about reacting, it’s about sticking to your plan.
A plan that is rooted in your own goals, tolerance to investment risk, and available capital to invest.
The power of long-term investing – time in the market
Here’s the reality.
You don’t need to be a market wizard, you just need to be patient. By staying invested through ups and downs, you benefit from:
- Compounding returns
- Dividend reinvestments
- Natural market recovery
- Reduced trading costs and tax events
Combine that with a diversified tax-efficient investment portfolio and regular rebalancing, and you’ve got a strategy built for resilience and growth.
Time in vs timing the market – quick summary
Timing the market might feel smart, however, it’s a game even the pros find difficult to win.
Time in the market? That could be your edge.
By staying invested, you give your money time to:
- Grow
- Ride out volatility
- Compound over decades
So next time you’re tempted to sell in a downturn, be clear why you’re doing it.
Understand the risks.
And consider whether time in is a much better long-term investment strategy than trying to time the market.
Factors to consider
- The challenges and risks associated with predicting market movements.
- The potential costs of missing the market’s best-performing days due to market timing.
- How emotional responses to market volatility can lead to poor investment decisions.
- The advantages of consistent, long-term investment strategies over frequent trading.
- The importance of aligning investment strategies with personal financial goals.
- If time in vs timing the market is the best option for your goals and capacity for loss.
